Date of Award

2025

Degree Type

Open Access Dissertation

Degree Name

Economics, PhD

Program

School of Social Science, Politics, and Evaluation

Advisor/Supervisor/Committee Chair

Thomas Willett

Dissertation or Thesis Committee Member

Levan Efremidze

Dissertation or Thesis Committee Member

Graham Bird

Terms of Use & License Information

Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2025 Silviu Velovici

Keywords

Market implied rate, Put-call parity, Put-call parity implied rate

Subject Categories

Economics | Finance

Abstract

This study investigates the interest rate implied by put-call parity as an alternative, market-based proxy for the risk-free rate. Studying the implied risk-free rate from option prices is important because it provides insights into how market participants collectively perceive short-term financing conditions, independent of official Treasury-Bill yields. Since Treasury securities and the LIBOR are conventionally used as proxies for the risk-free rate, any persistent discrepancy between the put-call parity implied rate and the Treasury-Bill rate, or the put-call parity implied spread, can be interpreted as a signal of market frictions, investor behavior anomalies, sentiment-driven pricing dynamics, or information asymmetries.

By rearranging the classical put-call parity equation, the implied interest rate is derived from European-style option prices on the S&P 500 (SPX) index and the underlying spot price. Using a high-frequency dataset of SPX options across various maturities between January 1, 2009 and December 31, 2019, the time-series behavior of the implied rate with and without transaction costs is analyzed along with its deviation from benchmark interest rates (such as Treasury-Bill yields and LIBOR). The results reveal persistent deviations from theoretical parity suggesting the presence of market frictions and investment behavior that distort the no-arbitrage conditions assumed in theory. It is found that the implied rate contains informational value about market sentiment, offering new insights into the functioning of derivatives markets. In our empirical results, the differences in the implied rate relative to risk-free benchmarks seem to be reflecting investor sentiment and option demand imbalances, making it a useful indicator of market efficiency. These findings have implications for option pricing and interpretation of market efficiency. In addition to that, the explanatory power of investor sentiment indicators on the spread between the interest rate implied by put-call parity and the prevailing U.S. Treasury-Bill rate is analyzed. . Fluctuations in the spread reflect imbalances in option demand driven by investor sentiment – for example, fear-driven demand for puts or speculative call buying. The analysis also offers a new perspective on the role of non-rational behavior and the fragility of price discovery in options markets. Moreover, the model has practical implications for market participants who rely on derivative prices.

While the put-call parity implied rate theoretically reflects the risk-free rate in an arbitrage-free market, persistent deviations from Treasury-Bill yields suggest the influence of behavioral biases or sentiment-driven mispricings. For example, during periods of heightened market fear like the 2008-2009 financial crisis and the 2016 period leading to Brexit, investors purchased large amounts of put options for downside protection. This surge in demand drove put prices up, distorting the put-call parity relationship and causing the implied rate deviation to widen, signaling excessive risk aversion. Conversely, optimistic sentiment tends to compress the spread. These findings suggest that sentiment plays a significant role in driving deviations from theoretical parity. 

ISBN

9798293805686

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